Blackberry / Prem Watsa
The whole investment world knows about what is going on with Blackberry. They reported their quarterly result today and it indeed was the disaster the company signalled last week, which wasn’t a surprise to the marketplace. Indeed, optimists that were wearing glasses with a very deep hue of rose could pick out some elements that did not lead to total despair, but the pickings are slim.
My post is a very simple one – Prem Watsa’s very conditional US$9/share offer is genuine. There is a whole bunch of speculation why it will fall through, and these are legitimate (mainly there needs to be other CANADIAN backers in this offer other than Fairfax, who have already been badly singed with the acquisition of their 10% stake in the firm). However, one risk that media brings up which I do not believe to be a risk is the genuineness of Watsa’s intentions. I have been following Fairfax for over a decade, and it simply does not pay from a reputational standpoint for Watsa to be playing “games” on this one. It would harm his company’s future ability to pull off similar acquisitions.
With Blackberry trading at about $8/share, this would leave about 12-13% upside over a two month time frame. There is an outside chance (I’d weight this as roughly 25% at present) of other bidders coming into the foray, which would likely not be in the form of a clean takeout offer.
Watsa also has to consider if this deal falls through what he will do with his 52 million share stake in Blackberry, still worth around $420 million at current market value. He has about as much of an incentive to see something happen with his stake as the rest of the shareholders do.
Blackberry – Mother of all revenue misses
Blackberry pre-announced their quarter today, announcing that their revenue estimates are going to be about half of what analysts were expecting.
Their stock, surprisingly, was only down about 17% in the half hour that traders had to disseminate the information before the market closed. Quite frankly, given that their mass-market handset sales have plummeted to very little, I am surprised that they aren’t trading down further. Part of the reason why they haven’t dropped further is that there is implied value the company can fetch in some sort of liquidation.
Balance sheet-wise, they are still in a relative position of strength – with a couple billion in cash in the bank and no long-term debt. They’re probably going to have to utilize this for severance packages as they are laying off half their workforce.
Strategically speaking, Blackberry is now shifting to its roots in the business end – presumably getting out of the consumer market. It will be interesting to see whether there will be much of a market left for the technology side within organizations.
That said, if the stock gets hammered further, I will be eyeing some for a purchase. It is still slightly away from a point where I will consider a purchase and I would also need to see the actual quarterly results themselves (which will paint a bunch of doom and gloom). There will also be the component of people that will be dumping their stock by the end of the year to book a tax loss, and who wants to have the embarrassment of actually owning Blackberry any time this year? Anybody entering into the stock in 2013 will likely be guaranteed to be sitting on a loss.
On a total side note, if they are writing off their existing inventories of Z10s and other mobile units, I am actually in the market to just do a straight purchase without committing to any length of period for a mobile service contract. Maybe if they are going to do a fire-sale of inventory that I’ll finally pick up a new phone compared to the nearly-broken dinosaur I currently have for a mobile phone. Right now I clearly am not interested in paying $625 for one of them, but if they slash prices by half, I can easily upgrade. I did have a chance to try out the product and they are well designed, despite all of the negative mind-share that Blackberry has today.
Disclosure: No positions.
Blackberry, Nokia and Microsoft
Microsoft and Nokia announced a deal today where Nokia would functionally sell its mobile phone division to Microsoft and license the related intellectual property for a total cost of about 5 billion Euro.
The implications for Blackberry is that one potential strategic suitor (Microsoft) is probably gone. Just from a systems integration perspective it would take forever to fuse together technology from Nokia and Blackberry to make any sort of merge feasible.
The other data point is that 5 billion Euro gives a valuation benchmark for equivalent technology. Although the analogy is very loose, it does give some benchmark for Blackberry’s valuation – also noting that Nokia’s revenues that are being sold away consisted of about 15 billion Euro a year.
All in all, I am somewhat surprised that Blackberry is trading higher today.
Nothing really happening
Still waiting and seeing. I haven’t had many market inspirations lately. One of my positions has been significantly underperforming over the past month and this has contributed to some significant portfolio drag, which I am not entirely happy with since I was considering to jettison the thing before they got significantly hit on their last quarterly report. The underlying company’s liquidity has been less than ideal, but one would think they would have an incentive to find some sort of financing considering that its founder still has a double-digit percentage stake in the company.
My macroeconomic focus is less on geopolitical considerations (e.g. Syria) and more on what the impact of the anticipated reduction in US Federal Reserve policy accommodation will have on the economy. Clearly nothing good. Ironically I am thinking that longer term treasury bonds are looking attractive, but if those 10-year yields inch up above 3% then I think there would be a speculative position worth taking.
I also observe the REIT sector has taken a bit of a breather lately, but valuations are still nowhere close to where I would consider them attractive.
Over a quarter of my portfolio is in cash, and the majority of what I have invested in would be considered in the deep value category.